What's at the core of Cisco's plight?

Is it the global economy? Tech spending? Or is Cisco distracted by too many adjacent markets?

So is Cisco's disappointing Q2 guidance a symptom of the global economy? Of tech in particular? Or of Cisco specifically? Those were some of the questions and hypotheses posed by investment analysts, and summarized here in this post by the Wall Street Journal, as the industry and the markets digest the company's gloomy outlook for its current second quarter of fiscal 2011.

Cisco's Q1 was in line with analyst expectations, with per share earnings even beating estimates on an adjusted basis. But Cisco guided to a Q2 only 3% to 5% better than last year's second quarter, while Wall Street set its sights on 13% growth. And Cisco also fell far short of estimates on adjusted per share earnings for the quarter as well as full year 2011 revenue, which will be $1 billion to $2 billion shy of consensus forecasts.

Analysts are mixed as to whether Cisco's plight is indicative of the global economy, of a slowdown in tech spending, of Cisco distracted by its 30 adjacent target markets or of all three combined. Investment firm UBS believes Cisco may have its hand in too many pies:

(The) Miss may be reflective of Cisco spreading itself too thin, pursuing too many new markets w/ ongoing gradual networking share loss. Cisco is adding new sales reps to recapture growth.

Both UBS's Nikos Theodosopoulos and RBC Capital Markets' Mark Sue noted during the Q1 conference call Q&A that Cisco was resetting expectations significantly downward when the rest of the industry is meeting, beating and raising their outlooks.

Oppenheimer, as noted in the WSJ post, believes a combination of factors is at the core of Cisco's downturn. The firm believes it marks a period of transition for the company, which may require time and more uncertainty:

Cisco is gaining share in its strategic growth markets (UCS, video, etc.) but is also challenged in its core markets. This changing balance creates a prolonged transition period. We believe two areas of weakness (public sector, Europe) will take time to recover, weighing on Cisco's growth and gross margin profile. With a long transition ahead of it, Cisco will likely continue to send mixed signals for some time.

Ticonderoga Securities says Cisco's softness is a symptom of the "downturn 2.0" the investment firm pinpointed during Cisco Q4 of FY 2010. Q1 guidance provided during that quarter also disappointed analysts:

We highlighted Cisco as a victim of downturn 2.0 during our 4Q report, and certain parts of our supply chain coverage began to experience increased weakness with Cisco of late, with others likely to follow. ...the near term remains more uncertain and reflects the less than stellar tech trends we have been highlighting...

But the firm also notes  that Cisco may have misread the public sector market, where orders among US state government customers plunged 25% from last year, and 48% from Q4:

There are also likely some market share shifts, in our view. During the last earnings call, we asked Cisco about demand trends in the public sector given fiscal austerity programs around the world; however, the company seemed upbeat on near-term trends. Clearly, the trends changed as the quarter progressed, as the U.S. State Government weakened...central governments in Europe battened down the hatches and Japan was soft.

On the bright side, both Ticonderoga and Technology Business Research believe Cisco is well-equipped - perhaps best-equipped - to recover from this downturn if, indeed, it is a broader economic issue vs. a Cisco-specific situation. States TBR:

...even if the slowdown continues for the foreseeable future, Cisco's strong cash position and effective expense management strategies will enable it to navigate the troubled waters better than most, if not all, of its competitors.

More from Cisco Subnet:

All of today's Cisco news and blogs

Cisco's Borderless Networks vs. HP's Converged Infrastructure

QoS Lab 4 - AutoQoS VoIP (Switch)

Cisco Bolts Into High-End Network Security -- Again!

Cisco releases less expensive dual band 2x2 access point

Hidden Secrets in the Cisco ASA

Follow all Cisco Subnet bloggers on Twitter.Jim Duffy on Twitter


Join the Network World communities on Facebook and LinkedIn to comment on topics that are top of mind.

Copyright © 2010 IDG Communications, Inc.